California Resources Corporation (NYSE:CRC) - A Compelling Opportunity in California's Energy Landscape

Published on September 24, 2024 | Ticker: CRC

California Resources Corporation (NYSE:CRC) is an independent oil and natural gas exploration and production company operating exclusively within California. The company is committed to energy transition and has some of the lowest carbon intensity production in the United States. California Resources Corporation is in the early stages of permitting several carbon capture and storage (CCS) projects in California, positioning it as a leader in the state's decarbonization efforts.

In 2023, California Resources Corporation generated annual net income of $564 million, annual revenue of $2,813 million, annual operating cash flow of $645 million, and annual free cash flow of $460 million. The company's strong financial performance has enabled it to return significant capital to shareholders through dividends and share repurchases.

During the first quarter of 2024, California Resources Corporation produced 76,000 barrels of oil equivalent per day (Boe/d), including 48,000 barrels of oil per day. This performance was within the company's guidance range, despite a scheduled major maintenance turnaround at its Elk Hills power plant, which impacted gas sales volumes. The company generated $87 million in net cash from operating activities and $33 million in free cash flow during the quarter.

Looking ahead, California Resources Corporation expects gross production to average around 93,000 Boe/d in the second quarter of 2024, with net production ranging between 74,000 and 78,000 Boe/d. The company plans to deploy $50 million to $57 million in capital expenditures during the second quarter, focusing on operating efficiencies.

Business Overview

California Resources Corporation's portfolio consists of conventional reservoirs with stable and low-decline production profiles associated with waterfloods and steamfloods. This contrasts with unconventional reservoirs, which typically have high initial production followed by steep declines. The company's conventional assets provide predictability in cash flow and financial stability, with a large base of proved developed producing (PDP) reserves.

California Resources Corporation's operations are primarily focused in the San Joaquin, Los Angeles, and Sacramento basins in California. The company's assets include oil and natural gas fields, as well as power generation facilities, such as the Elk Hills power plant. California Resources Corporation's power generation capabilities provide a unique advantage, allowing it to optimize the utilization of its natural gas production and generate additional revenue streams.

In addition to its conventional oil and gas operations, California Resources Corporation is actively developing its carbon management business, known as Carbon TerraVault. This division is focused on building, installing, operating, and maintaining CO2 capture equipment, transportation assets, and storage facilities in California. The company's carbon management initiatives are a key part of its strategy to provide low-carbon energy solutions and help the state meet its ambitious climate goals.

Financials

California Resources Corporation's financial ratios demonstrate its strong financial position. As of March 31, 2024, the company had a current ratio of 1.41 and a quick ratio of 1.29, indicating a healthy ability to meet its short-term obligations. The company's debt ratio stood at 0.16, and its debt-to-equity ratio was 0.29, suggesting a conservative capital structure.

Liquidity

California Resources Corporation's liquidity position is also robust, with $403 million in cash and cash equivalents and $477 million in available borrowing capacity under its revolving credit facility as of March 31, 2024. The company's strong balance sheet and financial flexibility provide it with the resources to execute its strategic initiatives, including the pending merger with Aera Energy.

Pending Aera Merger

In February 2024, California Resources Corporation announced a definitive agreement to merge with Aera Energy, LLC, a leading operator of mature fields in California, primarily in the San Joaquin and Ventura basins. The all-stock transaction is expected to close around mid-year 2024, subject to customary closing conditions.

The Aera Merger is a transformational event for California Resources Corporation, as it will create significant scale and asset durability to meet California's growing energy needs. Aera's conventional assets are similar to California Resources Corporation's, with low royalty burdens and multi-stack producing zones. The transaction will also expand California Resources Corporation's leading carbon management platform, adding premium pore space and co-located CO2 capture opportunities that further strengthen the company's ability to support California's decarbonization efforts.

California Resources Corporation expects the Aera Merger to deliver $150 million in annual synergies, with $50 million of these run-rate synergies achievable within the first six months after closing. The company is confident in its ability to integrate the two businesses effectively and create meaningful long-term value for its shareholders.

Risks and Challenges

Regulatory Landscape and Permitting Challenges

California Resources Corporation's operations in California are subject to a complex regulatory environment, particularly with respect to well permitting. The company has faced challenges in obtaining new drilling permits in Kern County due to ongoing litigation related to the county's Supplemental Recirculated Environmental Impact Report (SREIR) for its Zoning Ordinance.

In March 2024, the California Court of Appeals ordered Kern County to set aside the approval of the Ordinance and SREIR and prepare a revised SREIR that addresses certain CEQA violations. Kern County has since released a notice of preparation for the Second Supplemental Revised Environmental Impact Report (SSREIR), which is expected to be considered by the Kern County Planning Commission in August 2024.

As a result of the court's ruling, California Resources Corporation currently plans to operate a single drilling rig within Kern County in 2024, with sufficient permits in hand to maintain this level of activity through the end of 2025. The company is also exploring alternative paths to navigate the permitting delays, including the use of conditional use permits and a multi-basin development strategy.

Outside of Kern County, California Resources Corporation is seeing progress in obtaining permits from the California Geologic Energy Management Division (CalGEM), the state's lead agency for oil and gas operations. While CalGEM is still working through a review of its permitting procedures, the company has been able to secure approvals for sidetracks and workovers, which provide an efficient means to bring on production at a fraction of the cost of new wells.

Recent Developments

Carbon Management Initiatives

California Resources Corporation's carbon management business, Carbon TerraVault, is a key focus area for the company. In March 2024, Kern County announced that California Resources Corporation's CTV I permit application would require further environmental review, with the County recommending continuation of the process to the August 2024 Planning Commission hearing.

Despite the delay, California Resources Corporation remains confident in its ability to obtain the final EPA and Kern County permits for the CTV I project in the second half of 2024, enabling the company to meet its target final investment decision (FID) on CTV I in the same timeframe and begin CO2 sequestration by the end of 2025.

The CTV I project is the first of its kind in California and will set the gold standard for CCS permitting in the state. California Resources Corporation's 1 billion metric tons of pore space and 20 million tons of injection capacity provide significant opportunities for future carbon management projects, which are attracting growing interest from potential emitters.

Outlook

California Resources Corporation is well-positioned to navigate the challenges in the regulatory environment and capitalize on the opportunities presented by California's energy transition. The company's pending merger with Aera Energy will create a stronger, more diversified entity with enhanced scale and financial flexibility to invest in both conventional oil and gas operations and carbon management initiatives.

Conclusion

With its strong balance sheet, robust liquidity, and focus on operational excellence, California Resources Corporation is poised to generate competitive returns, decarbonize California's hard-to-abate sectors, and deliver sustainable cash flow for years to come. The company's shares appear undervalued based on its intrinsic value and growth prospects, making it a compelling investment opportunity for those seeking exposure to California's energy landscape.

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